Traditional options contract are typically siloed within the exchange where it was created thereby limiting its liquidity.
Our protocol aims to solve the problem by introducing synthetic assets, also known as synths, in the form of a Liquid Options contract.
A Liquid Options contract gives traders the ability to enter and exit a contract position before expiration without being restricted to the exchange in which it was created. These options are minted into fungible tokens as synthetic assets (synths), enabling first-ever options that are not siloed to a single exchange.
The core strengths of our protocol are primarily focused on risk hedging for traders against extreme price volatility and highly leveraged trading for assets with limited order book depth (or even those with no order book, such as unlisted assets). Traders mint event-specific tokens, which fluctuate in market value, relative to changing market odds.
We utilize a tri-smart contract system which deploys three smart contracts simultaneously for every speculation:
The first contract acts as an escrow
holding the entire speculated pool of funds along with associated event-specific data such as creation date, expiration, type of asset, success condition, and so on.
The second contract handles the oracle
function. At event deployment, the oracle contract is told to call the event contract at a specific time in the future. At that point, it sets the settlement price for the event and sets the event to 'settled'. The event will then have an outcome and traders may withdraw rewards if they staked on the winning outcome.
The third contract is responsible for holding "o
" and "io
" tokens for each event;
"o" tokens represent the correct outcome.
"io" tokens represent the incorrect outcome.
When an event is created, the event creator is given the "o" tokens that represent the correct outcome based on the success condition that was set. Other participants receive either "o" or "io" tokens based on the position they choose to take.
Each event contract, which acts as the escrow, has a participation limit date to allow other traders to join the event. The event must also reach a certain pot size (TBA) to start. Otherwise, it will be cancelled.
Once the pot reaches the minimum required, it becomes an Active event. From this point until just before expiration, traders are able to exit their position if there are new entrants who are willing to take over the position.
At the conclusion of the event upon expiration, the escrow contract distributes rewards to either "o" or "io" token holders, depending on which side wins. Example:
Tesla stock price exceeds $3,000 in June 2021.
- Trader 1 believes the event will be positive ($TSLA exceeds $3,000 in June 2021), and so he stakes $5,000 on "o" tokens. At this point, the event cannot launch.
- Traders 2, 3, 4, 5, 6, 7, 8, and 9 are all bullish on Tesla and hence also stake $5,000 on "o" tokens. At this point, the event has $45,000 long on "o" tokens.
- As 90% of the event participants are speculating on one side of the event, trader 10 must mint an "io" token or else the event does not launch.
- If trader 10 were to speculate against Tesla price of $3,000 with a stake of $45,000, thereby making total pool worth $90,000 and the speculation of "o" vs "io" 50/50 odds, more users can come and speculate in favor of Tesla price exceeding $3,000 in June 2021.
Whenever an "o" or "io" token is minted, the odds are displayed in the UI. This ensures that the market is able to see when the odds are reasonable based on their risk appetite. Each full "o" or "io" token is denominated as $100 at event launch. These tokens are fractional so 0.01 token will be $1.
Using the Tesla example above:
An event starts with a $30,000 stake towards "o" tokens, which aim for a positive conclusion to the event, and $20,000 stake towards "io" tokens, which aim for a negative conclusion to the event. This event has a $50,000 minimum pot.
- At event launch, each "o" and "io" token is equal to $100.
- 300 "o" tokens equal $30,000 and 200 "io" tokens equal $20,000.
- If, a few weeks after the launch, traders become bearish on Tesla stock price, the value of "o" tokens may halve.
- If "o" tokens become $50 on the live market due to bearish sentiment, then the 300 minted "o" tokens are now collectively worth $15,000.
- Meanwhile, the "io" tokens should now be worth $175 each, as only 200 of them were minted as few people were bearish on Tesla at launch.
- Collectively, the 200 "io" tokens are worth $35,000 and the 300 "o" tokens are worth $15,000
At event conclusion, "o" token holders split all the pot money from "io" token holders if Tesla indeed crosses $3,000 in June 2021. Otherwise, the opposite happens with "io" token holders splitting all the pot money from "o" token holders. Tokenomics
Minters play the essential role of creating the market. Minters pay a minting fee
when they initially create the event and claim their "o" tokens.
Once an event becomes Active, whenever an "o" or "io" token is traded, the smart contract ties a trading fee
on the transfer and rewards it to the minter.
This system encourages token minting. While minters pay a one-time minting fee
, they get rewarded with the trading fees
from all subsequent transfers of those tokens being traded until the event expiration.Trading
Trading "o" and "io" tokens becomes naturally desirable if the market price of the tokens does not reflect realistic odds.
To continue using the Tesla example, at event launch, all "o" and "io" tokens were valued at $100. There simply could be more "o" or "io" tokens, depending on sentiment at the time of event launch.
However, after weeks passed, and the company misses it earnings, Tesla stock reaching $3,000 becomes less likely, and hence the market should rightfully price the "o" tokens less and "io" tokens more. This is where natural trading volume comes into play to reprice the token.
With Tesla's stock being very unlikely to reach $3,000 in June 2021, the holders of "o" tokens recognize the token will be worth $0 at event expiration and "io" tokens will get all the money in the pot. This leads to heightened sell volume in "o" tokens till the market feels true pricing is reached.
The inverse is true for "io" tokens. The market would buy out "io" tokens, pricing them higher as they will be more likely to win the entire pool of funds. If "io" tokens in which $30,000 is staked on Tesla exceeding $3,000 and $20,000 is staked on Tesla not reaching above $3,000, win, then $50,000 will be shared across 200 tokens.
This would drive tokens, that were initially price at $100, to be worth $250. Meanwhile, "o" tokens will be worth 0.